Investment Shastra

Problem of plenty…

Today there is a veritable explosion of financial information in the media. While business channels and magazines are anyway into overdrive, general news channels are striving not to be left behind. However, what is a bit concerning is that viewership is the highest only the daily stock market related programmes and not for other personal finance programmes. Even in those, many questions only pertain to stocks, with other aspects (such as insurance and mutual funds) taking the back seat.

It is therefore surprising that despite our obsession with stocks, the quantum of our wealth actually invested in the same, is fairly miniscule (4% or so, at last count). This incongruence is startling, to say the least. Why is this so? Some of the reasons could be:

1) Too many advisors:

This is paradoxical but true. Rather than increasing the number of investors, this could actually help in reducing them. It does not take much to be a stockmarket pundit. Spout a few words of jargon, pop-up on a couple of business channels and voila….you have a fan following. Follow this up with a website dedicated to proffering “advice” for a subscription fee and you are ready to go. However, when it comes to accountability for the advice, these people turn coy, blaming everything (even acts of God) except themselves when stocks do not perform the way they say they will. This puts off people and many stop investing after being saddled with a few dud recommendations. Is it not surprising that people hesitate to pay a qualified financial planner for a holistic plan and readily give their money to such quack-like advisors ?

2) Too much data:

As mentioned earlier, today we are actually experiencing “Tyranny of Choice” when it comes to market information. The ticker rules our lives (thankfully, we are spared on weekends), we are bombarded with statistics of all hues, be it the cash segment, F&O segment, institutional activity, quarterly results, etc. Unfortunately, just as a glass can hold only so much water, our brain ceases to process information beyond a point. Feeding it with more, makes it freeze into inaction. Many are in that state nowadays, overawed and overwhelmed by the deluge of information, yet mechanically continuing to watch more of the same.

3) Fear of volatility:

Often people inquire with me as to which stock is a good investment. While I do not have an idea a day,  I do name  a few good stocks once in a while. However, after a few days or weeks when I ask them whether they have invested, most of them say they have not done so, because the market is too volatile right now and they are waiting for it to stabilise. Well, I often joke that markets are stable only over the weekend and that too because they are closed. Volatility is part and parcel of any market. If you cannot stomach it, you should not be inquiring about stocks in the first place. Also, the media, instead of assuaging the viewers actually feeds on such volatility and makes mountains out of molehills making remarks like “Market crash reduces investor wealth by thousands of crores”. Extreme statements like these, scare off several potential investors who are sitting on the fence.

I think the best way to deal with this situation is to cut ourselves off from the clutter. Mentally, we can create our own list of favourites such as one favourite TV channel, one favourite website, one favourite magazine, etc. and stick only to those. They usually talk about the same developments anyway. With regard to self-styled advisors, zero may be a good number….After all, often their guess is as as good as ours.

Also, it would help if we changed our mental model of investing from one of action to one of inaction.  Every source mentioned above (stockbrokers included) want you to do SOMETHING. The shorter your horizon the better for them as they generate more income off you. Well, frustrate them by holding on to good investments for long periods of time. Stop being the sacrificial lamb at the altar of their greed.

Finally, treat volatility as a good friend who actually helps you buy good stocks at reasonable prices during panics.

This is a guest post from Jayant R. Pai, Vice President, PPFAS Ltd. PPFAS Ltd. is full service financial services organisation which applies the principles of Behavioral Finance in its advisory and money management activities.

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Jayant R. Pai, Vice President, PPFAS Ltd